August, 2016

Do your spouse or your children work for you? If they do, you could be paying them for the work they do and, in turn, reducing the profits of your business and the tax that you pay.

Employing your spouse or your children is particularly important where you are paying higher rate tax or if your spouse or child earns less than the current personal allowance. You may be able to reduce the tax that you pay by splitting your profits, earnings, or dividend income with your family member. Keep reading to learn more.

52 Ways to Save Tax – Part 23: Pay your spouse or children for work

If your spouse works in your business you can legitimately pay them a salary and contribute to a pension fund. A business partnership with your spouse can enable you to share trading income with them and your limited company can pay dividends to them if you each own some of the shares in the business.

Whilst there can be significant tax advantages to enjoy if you share your income with your spouse – particularly if they earn less than the personal allowance or you are a higher rate taxpayer – good professional advice is still recommended in order to minimise the risk of a challenge by HMRC.

Here are some tips to help you:

Payment must be for work actually done – you should draw up a list of your spouse’s responsibilities and keep a record of what they actually do. It is reasonable to pay them a salary commensurate with what it is they actually do, and you can base this on the ‘going rate’ for that work (the National Living Wage is a start).

The amount must actually be paid – you can’t simply ask your accountant to put the payment through your books at the end of the tax year. You need to actually make the payment, ideally through the bank so it is easy to prove.

Comply with PAYE procedures – you should get a P46 signed and complete the end of year PAYE forms as you would for any other member of staff. It may also help keep up their National Insurance contribution record even if they don’t pay any National Insurance on the salary.

By paying your spouse you can utilise their personal allowance and reduce your business profits, thereby reducing the amount of tax that you have to pay. You may also be able to do this if your children work for you, as we see next.

Employing your children in your business

Children under the minimum school leaving age can also be employed by your business for work that they do.

Bear in mind that children can only work a limited number of hours per week and the number of hours they can work is sometimes determined by the nature of the job (longer hours in occupations such as theatre and more restricted hours in areas such as bar work).

During term time children (from the age of 13) may work a maximum of 12 hours per week. During school holidays 13 to 14 year olds may work a maximum of 25 hours per week. 15 to 16 year olds may work a maximum of 35 hours per week.

Again, you should keep records of the work your children actually do for you. You should also pay them in the proper way (ideally through the bank).